Directors' remuneration report

Remuneration decisions for 2008/2009
key highlights

In 2009, our remuneration package will continue to have the same main elements as for 2008:

• base salary
• annual incentive
• long-term incentive plan

In addition, executive directors participate in pension arrangements and receive benefits such as life assurance and medical insurance.

The following key decisions have been made for 2008/2009 remuneration:

• at their own request, the executive directors will not be awarded any bonus for 2008
• base salaries for executive directors frozen at 2008 levels
• reduced the maximum level of incentives from 2008 levels by 175 per cent of salary
• strengthened the role for non-financial measures, introducing a balanced scorecard into the long-term incentive plan focused on the HBOS integration
• increased the role of risk-adjusted economic profit, by introducing it as a measure in the long-term incentive plan, in addition to its current use in the annual incentive
• changed the annual incentive plan so that the payment is deferred over three years, and subject to claw-back if the performance on which the incentive is based is found not to be sustainable
• determined that, from April 2012, executive directors will no longer participate in the final salary pension plan

The approximate make-up of the main components of our new package for executive directors on an expected value basis is shown below.

The package is designed to encourage a long-term and risk-based focus:

• Salary is a significant proportion of the total package, avoiding excessive leverage
• All incentives will be paid on a deferred basis over three years
• Deferred annual incentive is subject to claw-back, i.e. is not paid if performance on which the incentive is based is found to be unsustainable
• A combination of financial and non-financial measures encourages a long-term focus
• Economic profit, which is a risk-adjusted profit measure, is a core financial target

We believe that these arrangements are well aligned with the Financial Services Authority’s draft Code of Practice on Remuneration.